• Value Investors Only Care About Bear Markets

  A value-oriented investment approach in the style of Graham and Buffett does not focus on bull market performance. In fact, by definition, true value investing always focuses on weathering the bear market storms and coming out relatively unscathed.

• Most overpriced real estate markets
  They're culture-rich and scenically stunning. But invest in a home in any of these 10 cities and your balance sheet might take a beating.
• Stocks of brokerages catch investors’ fancy

  Betting on new product offerings, spread of online broking

• Worst seems to be over, for the time being: Raamdeo Agarwal

  Raamdeo Agarwal of Motilal Oswal feels that we have seen the worst of the correction and the worst seems to be over, at least for the time being. He adds that there has been an improvement in both the factors that led to the markets' dismal performance.

• Stockmarkets: Beauty Or The Beast

  Debates surrounding which stockmarket index is better do not include a discussion about their quality

• Prepare for an awesome autumn

  Those blinded by the summer correction into believing bad times and a bear market are ahead will miss this autumn's rally. Don't be among them. The correction could last a bit longer - and many do a W-like-bottom, bringing a whole additional roller-coaster ride before the rally. But there is a good up-move coming.

Posted by toughiee at 7:31 PM | Permalink | Comments | links to this post

Super broker Rakesh Jhunjhunwala sounded optimistic while talking about the Indian market weighed against its US counterpart at a recent meeting organised by Shailesh J Mehta School of Management, IIT, Bombay. While analysing the Indian market weighed against its US counterpart, Jhunjhunwala quoted the former US Federal Reserve Chairman Alan Greenspan: "History has not dealt kindly with the aftermath of protracted periods of low-risk premiums." The super broker feels the going will get tough for the Indian markets for the next few months. This is sad, he said as India has all the ingredients that markets value.

Click here for the full story.

Posted by toughiee at 5:42 PM | Permalink | Comments | links to this post

Periods of market turbulence lead to a flight to quality, or a flight to value.

When the markets are making new highs every day, solid large-cap value stocks are nobody’s favourite, as everybody is busy chasing growth stocks. It’s only when investors start having doubts about growth that attention shifts back to value investing.

Investors have for long been divided into two camps—those who believe in growth stocks, in the belief that their superior earnings growth justifies the price, and those who believe in hunting for under-priced stocks that offer value.

Growth investors believe in buying stocks with above-average earnings growth, no matter what the price. Value investors look exclusively for “bargains”, or stocks that are trading at a discount to their usual valuation.

Of course, the growth versus value debate is also a caricature—most investors opt for a mix of growth and value stocks. But many funds have sprung up to take advantage of the distinction between these two investing styles.

Which of them have done better during the recent sell-off?

MSCI Barra has a set of indices that distinguish between growth and value stocks and they show that while the world growth index has fallen 1.09% in August (till the 24th), the index of world value stocks is down 0.59%. That’s exactly as expected, since investors flock to value stocks during sell-offs. The MSCI US value index is up 2.33% this month, while the growth index is up 0.89%.

Emerging markets, however, are a sub-set of the growth stock universe, which is why both the emerging market growth stocks as well as the value stocks have been hammered. The EM growth stocks in the MSCI Barra universe are down 6.59% this month, while EM value stocks are down 6.53%. So the sell-off hasn’t spared EM value stocks. Year to date, emerging market value stocks are up 14.9%, compared with EM growth stocks being up 13%. The MSCI India value index is down 9.4% this month, while the India growth index is lower by 10.02%—only a marginal difference.

Proponents of value investing claim that value stocks do better over the longer term. That appears to be true for the US, where the MSCI Value index has given annualized returns of 4.82% over the last ten years, while the growth index has grown 4.10%.

But in India, value stocks have scored over growth stocks this year, over a one-year period, over the last two years and over the last five years. That’s surprising, because India is supposed to be a growth story. It’s only over a 10-year period that the MSCI India growth index has delivered higher annualized returns than the value index.

Posted by toughiee at 9:14 PM | Permalink | Comments | links to this post

• The hitchhiker's guide to mega bucks

  Egrets fly from one bank of a river to the other, in search of prey. But sometimes, even they opt for a free ride across the riverbed, sitting on the back of a submerged hippo. Wildlife enthusiasts may be familiar with this scene. However, the phenomenon of ‘riding on the hippo’s back’ need not be limited only to the nature’s galleria. After all, who doesn’t want to generate some gains from the hard work of others…?

• The magic potion revealed

  Banking, capital goods, media and fertiliser stocks will do well in future, while IT, auto and real estate sectors may see a slowdown.

• Don't worry, look at the brighter side

  As the dark clouds of the US sub-prime crisis and yen carry trade gather over the horizon, the silver lining will come from select emerging markets like India.

• Home Safe Home

  Stocks may plunge because of the crisis in global markets and political moves back home. But the India growth story is still tenable and promises gains for the patient investor.

• Ignorance is not bliss

  The discounted cash flow is not an effective valuation tool for commodity (capital-intensive) industries.

• Indian markets have outperform EMs: HSBC

  Read HSBC Global Research's report on how Indian markets have performed against other EM benchmarks in the current correction, in contrast to previous episodes.

Posted by toughiee at 5:50 PM | Permalink | Comments | links to this post

• Huff, Puff The House Is Down

  Subprime mortgages crash, then the global markets fall. There's a cautionary tale in it.

• 15000 Penny Punters

  Small investors with wily strategies brave the vagaries of the stockmarket

• Making sense of Sensex moves

  Sensational headlines such as “Sensex in free fall”, “Bloodbath on D-Street” and “Market faces mayhem” would have surely stirred up a storm in your teacup as you read the morning newspaper in recent weeks

• Taking stock after the correction

  In the sweeping correction that has caused global stock markets to tumble like nine-pins, the BSE Sensex has shed 9-10 per cent off its peak value. Stocks in sectors such as telecom, steel and construction have plummeted 15-30 per cent the past

• Time to get into secular high-growth stocks’

  Set aside funds to buy telecom, engineering as these sectors have great potential and are not related to politics in the longer term.

• ‘16,000 looks difficult for Sensex this year’

  With political troubles within the country and global uncertainties, investors are naturally reluctant to buy. But better value may emerge in the next couple of months.

• Store of value

  Markets seem to be on their way down. The analyst community is still guessing the next day’s index move. Gap down opening are leaving the traders clueless and volatility is the order of the day. Newspapers are agog with the description of the market plunge. However, there are stray incidences where the stocks have bucked the trend.

• The IPO game

  The Indian initial public offering (IPO) market is under the microscope again with the recent re-pricing of the South-based real estate major Puravankara Projects IPO. The initial price band of Rs 500-525 had to be scaled down to a much lesser range of Rs 400-450. The re-pricing has pointed towards three important facts.

• Getting real with real estate

  It is estimated that in the last 12 months, 23 real estate companies have raised a whopping $4.4 billion through IPOs, FPOs, GDRs and other avenues. And with reports that few more companies are going to hit the markets, the magnitude of real estate’s share in the already exceeding liquidity, is increasing exponentially. Also, it seems that investors’s exposure to real estate IPOs have been increasing like never before.

• Who's the real villain? CDOs or sub-prime mart?

  If I could be born again, and I had a head for big numbers, I'd like to be an investment banker in New York. Look at what I would do for a living. First, I would play in the collateralised debt obligation market. What this is, is not relevant, except to understand that CDOs are a more important cause of the financial crisis sweeping the western world than the infamous sub-prime mortgage market in the US.

• Long & Short Term Capital Gains Issues

  Calculating tax is a rather difficult exercise for individuals. More so, when it comes to mutual funds. This is because there are several calculations required for this purpose before arriving at the appropriate figure. Also, there is a need to do some segregation to remove any confusion. Here are some calculations where we use the basic tax rate on these investments excluding education cess for better understanding.

Posted by toughiee at 10:01 AM | Permalink | Comments | links to this post

“The individual investor should act consistently as an investor and not as a speculator. This means..... that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that sati sfies him that he is getting more than his money’s worth for his purchase.”

“An investment operation is one which, upon thorough analysis promises safety of principal and adequate return. Operations not meeting these requirements are speculative.”“Most of the time common stocks are subject to irra tional and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.”

“You are neither right nor wrong because the crowd disagrees with you. You are right (or wrong) because your data and reasoning are right (or wrong).”

“The one principle that applies to nearly all these so-called ‘technical approaches’ is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our own stock market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus ‘following the market’. “We do not hesitate to declare that this approach is as fallacious as it is popular.”

“While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”

“Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer ... an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”

“To have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.”

“Strangely enough we shall suggest as one of our chief requirements... that our readers limit themselves to issues selling not far above their tangible-asset value.”

Posted by toughiee at 9:45 PM | Permalink | Comments | links to this post

Posted by toughiee at 2:31 PM | Permalink | Comments | links to this post

• India best long-term bull story among EMs: CLSA (Report)
• Correction phase may end soon
• History teaches this is just a bull market correction: Ken Fisher
• Role and importance of leveraging
• Stockmarket: Panic Buying
• Why Warren Buffett Plays Bridge

Posted by toughiee at 2:43 PM | Permalink | Comments | links to this post

• How a Panicky Day Led the Fed to Act - WSJ
  Freezing of Credit Drives Sudden Shift; Shoving to Make Trades
• Lessons of Past May Offer Clues To Market's Fate - WSJ
• In Asia, It's a World of Extremes - WSJ
  China's Insular Markets Defy Slump in Shares; Other Trends Pose Worry
• Asian Traders Brace For More Instability; Feng Shui Consultations - WSJ
• Crises Counsel - Fortune

  Will the subprime lending meltdown and credit crunch send us into a financial free fall? We asked the sharpest minds in business to share their reactions to the downturn, and their insights on the road ahead.

Posted by toughiee at 6:26 PM | Permalink | Comments | links to this post

Posted by toughiee at 5:32 PM | Permalink | Comments | links to this post

Posted by toughiee at 12:04 PM | Permalink | Comments | links to this post

More than 70 years ago, two Columbia professors named Benjamin Graham and David L. Dodd came up with a simple investing idea that remains more influential than perhaps any other. In the wake of the stock market crash in 1929, they urged investors to focus on hard facts — like a company’s past earnings and the value of its assets — rather than trying to guess what the future would bring. A company with strong profits and a relatively low stock price was probably undervalued, they said.

Their classic 1934 textbook, “Security Analysis,” became the bible for what is now known as value investing. Warren E. Buffett took Mr. Graham’s course at Columbia Business School in the 1950s and, after working briefly for Mr. Graham’s investment firm, set out on his own to put the theories into practice. Mr. Buffett’s billions are just one part of the professors’ giant legacy.

Yet somehow, one of their big ideas about how to analyze stock prices has been almost entirely forgotten. The idea essentially reminds investors to focus on long-term trends and not to get caught up in the moment. Unfortunately, when you apply it to today’s stock market, you get even more nervous about what’s going on.

Most Wall Street analysts, of course, say there is nothing to be worried about, at least not beyond the mortgage market. In an effort to calm investors after the recent volatility, analysts have been arguing that stocks are not very expensive right now. The basis for this argument is the standard measure of the market: the price-to-earnings ratio.

It sounds like just the sort of thing the professors would have loved. In its most common form, the ratio is equal to a company’s stock price divided by its earnings per share over the last 12 months. You can skip the math, though, and simply remember that a P/E ratio tells you how much a stock costs relative to a company’s performance. The higher the ratio, the more expensive the stock is — and the stronger the argument that it won’t do very well going forward.

Right now, the stocks in the Standard & Poor’s 500-stock index have an average P/E ratio of about 16.5, which by historical standards is quite normal. Since World War II, the average P/E ratio has been 16.1. During the bubbles of the 1920s and the 1990s, on the other hand, the ratio shot above 40. The core of Wall Street’s reassuring message, then, is that even if the mortgage mess leads to a full-blown credit squeeze, the damage will not last long because stocks don’t have far to fall.

To Mr. Graham and Mr. Dodd, the P/E ratio was indeed a crucial measure, but they would have had a problem with the way that the number is calculated today. Besides advising investors to focus on the past, the two men also cautioned against putting too much emphasis on the recent past. They realized that a few months, or even a year, of financial information could be deeply misleading. It could say more about what the economy happened to be doing at any one moment than about a company’s long-term prospects.

So they argued that P/E ratios should not be based on only one year’s worth of earnings. It is much better, they wrote in “Security Analysis,” to look at profits for “not less than five years, preferably seven or ten years.”

This advice has been largely lost to history. For one thing, collecting a decade’s worth of earnings data can be time consuming. It also seems a little strange to look so far into the past when your goal is to predict future returns.

But at least two economists have remembered the advice. For years, John Y. Campbell and Robert J. Shiller have been calculating long-term P/E ratios. When they were invited to a make a presentation to Alan Greenspan in 1996, they used the statistic to argue that stocks were badly overvalued. A few days later, Mr. Greenspan touched off a brief worldwide sell-off by wondering aloud whether “irrational exuberance” was infecting the markets. In 2000, not long before the market began its real swoon, Mr. Shiller published a book that used Mr. Greenspan’s phrase as its title.

Today, the Graham-Dodd approach produces a very different picture from the one that Wall Street has been offering. Based on average profits over the last 10 years, the P/E ratio has been hovering around 27 recently. That’s higher than it has been at any other point over the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off.

Now, this one statistic does not mean that a bear market is inevitable. But it does offer a good framework for thinking about stocks.

Over the last few years, corporate profits have soared. Economies around the world have been growing, new technologies have made companies more efficient and for a variety of reasons — globalization and automation chief among them — workers have not been able to demand big pay increases. In just three years, from 2003 to 2006, inflation-adjusted corporate profits jumped more than 30 percent, according to the Commerce Department. This profit boom has allowed standard, one-year P/E ratios to remain fairly low.

Going forward, one possibility is that the boom will continue. In this case, the Graham-Dodd P/E ratio doesn’t really matter. It is capturing a reality that no longer exists, and stocks could do well over the next few years.

The other possibility is that the boom will prove fleeting. Perhaps the recent productivity gains will peter out (as some measures suggest is already happening). Or perhaps the world’s major economies will slump in the next few years. If something along these lines happens, stocks may suddenly start to look very expensive.

In the long term, the stock market will almost certainly continue to be a good investment. But the next few years do seem to depend on a more rickety foundation than Wall Street’s soothing words suggest. Many investors are banking on the idea that the economy has entered a new era of rapid profit growth, and investments that depend on the words “new era” don’t usually do so well.

That makes for one more risk in a market that is relearning the meaning of the word.

Posted by toughiee at 7:23 PM | Permalink | Comments | links to this post

• Click here for the presentation file
• HT Mint newspaper has also given insights by Rakesh Jhunjhunwala here.

He owes a lot to resurrection of a dormant and vigorous entrepreneurial gene of India. "The country has rediscovered its confidence."

There has been a strong improvement in India's macroeconomic indicators, combined with a robust banking system.

Improvement has also been observed in India's corporate performance, powered through productivity gains. Jhunjhunwala is convinced that on-going reforms would have a multiplier effect on India's economy.

Jhunjhunwala's investment strategies

Jhunjhunwala learnt investment strategies the hard way. And he was more than willing to share it with his audience. Here are a few gems from his book of learning

5 things you need to be successful

"Patience may be tested, but conviction will be rewarded," he asserted. He appealed to the budding investors to go by what George Soros said: 'It's not important whether you are right or wrong, it more important how much you lose when you are wrong and how much money you make when you are right.'

To be successful in investing, five things are critical. There has to be:

• an attractive, addressable, external opportunity;
• a sustainable competitive advantage;
• scalability and operating leverage; and
• a qualified and integral management
• Last but not least, it is of vital importance what one buys and at what price.

'India has everything'

'Be realistic'

He said enormous wealth was created over the last five years because opportunities in India have grown manifold.

Admitting that gains were going to be moderate in future unlike the manifold rise over the last few years, he advised investors to be realistic in their expectations.

'The market is always right'

"Blindly following stock picks by big investors is not a wise thing to do," he warns investors. "I don't think the government is necessarily interested in hurting growth. The government is interested in growth with controlled inflation." "The market," he says, "is always right. Markets cannot be taught, they have to be learnt."

"We must have an attitude where we must balance fear and greed," was the hot tip by one of India's most high-profile investor.

Why growth will continue

According to him, growth enablers (such as favourable demographics, higher base of skilled people and education base), liberalisation catalysts (such as competition), fall in interest rates, multiplier effect (on account of reforms), structural changes in quality of corporate earnings and micro trends (such as change in mindset of companies who are aspiring to become global) are likely to drive India's growth story to a higher level.

Labels: Rakesh Jhunjhunwala

Posted by toughiee at 6:59 PM | Permalink | Comments | links to this post

Ace investor and partner of Rare Enterprises, Rakesh Jhunjhunwala, also called ‘The Warren Buffet of India” is still bullish on the Indian markets and sees Sensex touching 25,000 level by 2012. However, he is of the opinion that world equity markets are bound to get shaken in the wake of ongoing subprime mortgage issue and the next few months will be tough for them.

Addressing Finance Continuum, 2007 at SJMSOM, IIT Mumbai, he said that crisis gives best buying opportunities. Subprime issue has hit the global markets severely and there has been a negative sentiment for past two weeks across the globe. He also feels that Indian markets will be less affected than the global markets including Asian markets.

Jhunjhunwala further added that fundamentals are still strong and Indian markets have all the ingredients to sustain the growth.

Expressing his views on overseas investment, he said that Indian markets have still to offer a lot. Jhunjhunwala has plans to explore overseas markets after 2012 and also wants to build up organizations.

Talking on house-hold savings and its importance on equity markets, he predicts that by 2012, over USD 57 billion from house-hold savings will be invested in the equity market. If his prediction comes true then Indian markets will not face liquidity crunch issues. Currently, house-hold savings investment in equity market is around USD 12 bn.

Additional Reading

• The Economic Times has covered this news here: India's equity returns can be delayed, but not denied
• An another note on his visit is available here.
• Another blog covers this topic here.

Posted by toughiee at 6:48 PM | Permalink | Comments | links to this post

Source: WEB's Speeches & Writings

But he is not just a man with a large heart and a matching wallet. Also known as The Sage of Omaha, he is also full of wisdom and wit.

Here are some of his gems of advice for investors who look at the stock market to make a fortune, culled from various publications, his speeches and writings:

• 'Never invest in a business you cannot understand.'

• 'Always invest for the long term.'

• 'Remember that the stock market is manic-depressive.'

• 'Buy a business, don't rent stocks.'

• 'Price is what you pay. Value is what you get.'

• 'Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.'

• 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'

• 'Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.'

• 'Buy companies with strong histories of profitability and with a dominant business franchise.'

• 'It is optimism that is the enemy of the rational buyer.'

• 'As far as you are concerned, the stock market does not exist. Ignore it.'

• 'The ability to say 'no' is a tremendous advantage for an investor.'

• 'If you're doing something you love, you're more likely to put your all into it, and that generally equates to making money.'

• 'My idea of a group decision is to look in the mirror.'

• 'Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.'

• 'The smarter the journalists are, the better off society is.'

• 'Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.'

• 'Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.'

• 'You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right - that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else.'

• 'There seems to be some perverse human characteristic that likes to make easy things difficult.'

• 'In the short run, the market is a voting machine but in the long run it is a weighing machine.'

• 'It's only when the tide goes out that you learn who's been swimming naked.'

• 'Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy.'

• 'There are three kinds of people in the world: those who can count, and those who can't.'

• 'It takes 20 years to build a reputation and five minutes to lose it.'

• 'The first rule is not to lose. The second rule is not to forget the first rule.'

• 'Wide diversification is only required when investors do not understand what they are doing.'

• 'Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.'

• 'We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.'

• 'Our favourite holding period is forever.'

• 'If past history was all there was to the game, the richest people would be librarians.'

• 'Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful.''

• 'Your premium brand had better be delivering something special, or it's not going to get the business.'

• 'You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.'

• 'We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own assets.'

• 'Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.'

• 'Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.'

• 'The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.'

• 'Risk can be greatly reduced by concentrating on only a few holdings.'

• 'Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.'

• 'Lethargy, bordering on sloth should remain the cornerstone of an investment style.'

• 'An investor should act as though he had a lifetime decision card with just twenty punches on it.'

• 'An investor needs to do very few things right as long as he or she avoids big mistakes.'

• 'Turnarounds' seldom turn.'

• 'The advice 'you never go broke taking a profit' is foolish.'

• 'It is more important to say 'no' to an opportunity, than to say 'yes.'

• 'It is not necessary to do extraordinary things to get extraordinary results.'

• 'An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.'

• 'It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.'

• 'In the business world, the rearview mirror is always clearer than the windshield.'

• 'A public-opinion poll is no substitute for thought.'

• 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'

• 'The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.'

• 'Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.'

• 'The investor of today does not profit from yesterday's growth.'

• 'Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.'

• 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'

• 'I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.'

• 'I always knew I was going to be rich. I don't think I ever doubted it for a minute.'

• 'We enjoy the process far more than the proceeds.'

• 'You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.'

• 'I buy expensive suits. They just look cheap on me.'

• 'Let blockheads read what blockheads wrote.'

• 'I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.'

• 'My grandfather would sell me Wrigley's chewing gum and I would go door to door around my neighbourhood selling it. He also sold me a Coca-Cola for a quarter and I would sell it for a nickel each in the neighbourhood, so I made a small profit. I was always trying to do something like this.'

• 'A public-opinion poll is no substitute for thought.'

Posted by toughiee at 10:20 PM | Permalink | Comments | links to this post

His most famous principle was, “Invest in what you know”. His other stock-picking principles include, “Do your research and set reasonable expectations”, “Know the fundamentals”, “Invest for the long-run’.

Some investment nuggets from him:

“Investing without research is like playing stud poker and never looking at the cards.”

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”

“Bargains are the holy grail of the true stock picker. The fact the 10 to 30 per cent of our net worth is lost in a market sell-off is of little consequence. We see the latest correction not as a disaster but as an opportunity to acqu ire more shares at low prices. This is how great fortunes are made over time.”

“Things are never clear on Wall Street, or when they are, then it’s too late to profit from them. The scientific mind that needs to know all the data will be thwarted here.”

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”

“... We’re forcing people to do the wrong things. They look at what’s hot. They spend so much time trying to figure out if the market is going up. That’s so unimportant. It’s about earnings. They need to follow the earnings.”

“If you spend more than 13 minutes analysing economic and market forecasts, you’ve wasted 10 minutes.”

“It is the rare investor who doesn’t secretly harbour the conviction that he or she has a knack for divining stock prices or gold prices or interest rates. In spite of the fact that most of us have been proven wrong again and again, it’s uncanny how often people feel most strongly that stocks are going to go up or the economy is going to improve just when the opposite occurs.”

“When it comes to predicting the market, the important skill here is not listening, it’s snoring. The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as lo ng as the fundamental story of the company hasn’t changed.”

“Absent a lot of surprises, stocks are relatively predictable over 10-20 years. As to whether they’re going to be higher or lower in two or three years, you might as well flip a coin to decide.”

Posted by toughiee at 10:13 PM | Permalink | Comments | links to this post

Yes, Radha, the bust in USA will hit us in India.

In May 2006 when the BSE-30 Index declined by 17% in eight sessions, we wrote about the bubble in the Middle East markets - Markets Do Fall and said, "Better economic and GDP growth is not an assurance to a perpetually booming stock market".

The link between financial markets in the US and Indian stock markets Today, as the Indian markets get lashed by something called sub-prime mortgage, we are being asked to remain calm and cool as there is no linkage between what happens to the financial markets in the US and to the Indian stock market.

Well, that is a partial truth and, in effect, a partial lie.

Stock markets are influenced by 2 factors: 1) how much do companies earn, and 2) how much are people willing to pay for those earnings.

The earnings power of a company is a function of the business of the company, its management, and the overall growth rate in the economy in which it operates. There is little change here in our view and we should safely assume that India's GDP will grow at a 6% to 6.5% per annum rate for the next few years. (Many more optimistic people have a higher GDP growth rate for India at 8% plus but we don't subscribe to that view as yet.)

Understanding liquidity & sub-prime debt How much people are willing to pay for those earnings is a function of what economists call "liquidity" and though there is no clear definition of what "liquidity" is, one can assume that it is how much money is sloshing in the system. Imagine you are at a bar and everyone is feeling a little good from the various other liquids that the bar tender has to offer for a price, of course. Then the bar tender says, "Hey, folks, how about I cut the price of the drinks by 50% - anyone want some more?"

You bet! The crowds get bigger and people feel even more elated. With all those drinks available on the cheap, they lose their sense of judgment. Human nature is anyways tuned to drift into flirtations. With a few more drinks, the drifting becomes a reality. The poor bloke standing next to you in this bar - a total stranger - suddenly feels like a friend. You begin chatting. By the end of the fifth glass, the poor fellow who works as a waiter in some corner restaurant in some obscure town in USA now looks like a promising young man who could one day start his own restaurant, build his own mall, and maybe have a chain of restaurants. So you lend him money to buy a house. He is actually what the credit rating agencies would call a "sub-prime credit risk". But, because that bar tender gave you all those free drinks, in your eyes he becomes a good risk and better still, you turn to the other drunk next to you and re-sell the loan you made to this sub-prime fellow for a profit. And why do you sell the loan for a profit? Because the guy you sell it to (a European, Japanese, Middle Eastern, whoever) is more drunk than you because the bar tender in his country also gives him free drinks. And he cannot assess the risk profile of that sub-prime American any better than you can. So all the drunks are happy. And you use that profit to make another loan to another poor sub-prime fellow and so on and so forth......

Since 2003 all the drunks are having a good time, lending and buying and selling sub-prime loans to each other.

All the sub-prime folks who got this silly money in 2003, 2004, and 2005 from the folks at the bar thought they were rich and started buying big houses and big cars and spent money which was not earned, but borrowed.

The bar tender is serving the drinks because he needs to make sure everyone feels good. There may be an election around the corner. Or if he serves his drinks quick and fast, some big bank group may come in and hire him as a consultant or make him a chairman of a global financial conglomerate riding this tide of global liquidity.

So the central banks were the bar tenders, doling out drinks and money as if their printing presses had to print, and print and print. Rather than being the men in grey suits with grumpy faces worried about the fate of the financial world, they became the stars on TV channels and the toast of conventions: their suits were grey but they were talking about this perfect world and this goldilocks, fairy tale.

And that fairy tale found its way to India and the rest of the emerging markets. From being the poor countries with corrupt governments and inept governments that have consistently failed to look after the needs of their people, these countries got a new name: BRIC. They became the darlings of the drunks. Yes, while there have been significant improvements in many countries - including India - the perception of the depth or the sustainability of these improvements were exaggerated when the drunks at the bar came calling.

India has seen nearly US$ 50 billion of foreign inflows - of which US$ 40 billion have come in since 2003. Yes, the Indian companies and the Indian stock markets did deserve a lot of that but the assessment of risk has been, in my opinion, absent.

The sub-prime fall out The sub-prime blow has so far seen some US$ 2 billion of losses from funds that have been closed down. There is maybe another US$ 50 to 100 billion of losses that may yet be exposed, according to people who track this industry. While US$ 100 billion is nothing in a world where the market cap of stocks is US$ 30 trillion (300 times the potential losses) and where bonds worth maybe US$ 100 trillion float around, the bar tenders are now serving less of that booze. The drunks are getting more sober. They now see that sub-prime person as someone who may be lucky to keep his job in a restaurant as opposed to their previous assumption (over the rim of their liquor glass) that they were lucky to stumble on the founder of the next new big restaurant chain in USA. And they will price that loan accordingly.

And they will see the investment opportunities in the emerging markets with a little better understanding of risk. Don't get me wrong: the fundamentals for India are fantastic, and money will flow in to India over the next decade. Sensible, risk-assesses money. But for now, the silly money will go out. The P-Note folks will vacate and that will cause the Indian market to suffer.

India has, via its P-Note policy, linked itself to silly money. We enjoyed the ride for the past 4 years, now we will feel a bit of pain.

Keep your money ready to invest. Stay disciplined, never be carried away, politely tell the bartenders to keep their extra, free drinks. And you will profit: steadily but surely.

Ajit Dayal is Director, Quantum Advisors Private Limited. Ajit is the founder of Quantum Asset Management Company Pvt. Ltd. and also Quantum Information Services Pvt. Ltd., which owns Equitymaster & Personalfn.

Posted by toughiee at 7:09 PM | Permalink | Comments | links to this post

I often hear the term "value investing," too much to the point where I begin asking myself two fundamental questions:

1. What do people really mean when they say that they are value investing?

2. What makes a value investor?

Let's be clear from the start. Ben Graham was an investor. Warren Buffett is an investor. Mason Hawkins is an investor. The term value investing was given to their style simply to define what they do best: finding valuable--companies worth more than their current market price--investments.

In my opinion, the best definition of an investment was given by Ben Graham in Security Analysis:

So there it is. A simple, yet elegant definition of what investing ought to be. If you want to call it value investing, be prepared to explain what that really means. When Charlie Munger remarked "all intelligent investing is value investing," he knew exactly what he was saying. If you say you are a value investor, then without exception, you should be applying the three qualifications that Ben Graham laid down over seventy years ago. Each investment should be made only after a detailed assessment of the facts, a compelling valuation that provides a margin of safety, and a return that is better than other viable options adjusted for risk. I would be willing to wager that at least 75% of so called value investors don't come close to passing the test. You can forget about the majority of mutual funds with the name "Value" in them, as they define their investment operation as low P/E, low P/B stock picking.

Charlie Munger said it best when he remarked:

The number one key to a intelligent investing approach is discipline. Discipline is what prevents you from losing money. Preservation of capital is name of the game. I am glad I got a [relatively] early start in investing my own money, because when I look back at my approach, it wasn't truly the prudent approach outlined by Graham. It worked, but the great thing about this game is that if you stay disciplined you are going to learn a lot over time.

The key to remember is that a value investor does not exist in bull markets. Just about any approach during bull markets will make you money. As Seth Klarman aptly put it "Bull markets have of way making everyone look like a genius." A true value investing based approach is designed for bear markets. A value investor's approach is one that can weather the storm during the bear markets and come out with a minimal loss of capital. A successful investing record should be measured in bear markets alone. Earning 90% in a year when the overall market is up 25% tells me zilch about your abilities as an investor. Just look at how many Internet funds were up over 100% per year during their heyday. Losing 10% when the market has tanked 25% on the other hand shows me that an intelligent and disciplined approach was used in making investment decisions.

As Warren Buffet said

Posted by toughiee at 6:09 PM | Permalink | Comments | links to this post